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Rural Proofing SERC - RE0229

Economic activity in the UK is very unevenly distributed across space. In 2004, Gross Value Added (GVA) per person (adjusted for commuting) in Inner London and Berkshire, Bucks and Oxon was £24,500 and £23,700 respectively, about 40% above the UK average of £17,100. In the same year, Cornwall and the Isles of Scilly, West Wales and the Valleys and Tees Valley and Durham had GVA per head of £11,000-£13,000, values 24% or more below the UK average. The differences would become even more striking if we moved down spatial scales to consider smaller neighbourhoods.

It is inconceivable that this marked unevenness can be explained purely by inherent differences in physical geography (e.g. natural resources). Instead, over time, the economic system amplifies and reinforces initial differences to generate persistent disparities. This happens because there are self-reinforcing benefits (“agglomeration economies”) from the concentration of activity. These benefits may arise in many different ways. Alfred Marshall suggested knowledge or human capital spillovers, labour market interactions and input-output linkages as sources. Work by economists has formalised modelling of these different sources and their implications, while economic geographers have extended this list to include, e.g., untraded interdependencies and the role of institutional and social capital.

A range of costs offset these benefits. As activity concentrates, the price of scarce resources increase; firms face more competition; roads become congested; pollution increases. In a modern economy, the trade-off between these costs and benefits determines which areas are rich and which are poor; which grow fast and which grow slowly. Technological change, globalisation, policy and many other factors are changing this trade-off, with fundamental implications for the UK’s spatial economy. Responses to these changes are not instantaneous, instead playing out over time as people and organisations slowly adjust. And, of course, government policy will shape all these relationships and the nature of the resulting interdependencies.

Understanding spatial disparities, and identifying the appropriate policy response, requires a much deeper understanding of these costs and benefits. What causes them? Are they changing? What are the implications? What policy interventions are effective in response to these changes? Are there trade-offs between spatial disparities and economic efficiency? These questions are difficult to answer. There are many sources of costs and benefits and their importance may differ across individuals, firms and locations, raising the possibility of sorting of different types across places. As agglomeration economies depend on spatial interaction, sorting and outcomes are also interdependent. This can mean different outcomes for initially similar people or places (multiple equilbiria) and that shocks persist over time (path dependency). The crucial question is thus: to what extent are disparities the result of heterogeneous individuals or firms being in different places (“sorting”) as distinct from differences in outcomes for identical individuals or firms in different places (“place-based effects”).

SERC is undertaking a detailed examination of the scale and nature of UK disparities and how these are changing over time. In particular, we are examining to what extent spatial disparities in income are the result of composition as distinct from place-based effects and how variations in the cost of living and amenities change our understanding of spatial disparities. Our current work is focussed on the differences between regions and between cities.

DEFRA is concerned with many of these issues with regard to rural areas as part of its role as a joint delivery partner for PSA7 and in formulating the Government’s response to the Rural Advocates Report and the Taylor Review. In light of this interest, the current proposal is concerned with the work necessary to extend our analysis on the scale and nature of UK disparities to cover rural areas (using the governments rural/urban definition), as well as to examine additional aspects of disparities that may be particularly important in a rural context.
1. To increase our understanding of the nature and extent of spatial disparities in the UK.
2. To extend SERCs current projects – on (a) the role of sorting versus place and (b) quality of life – to include comparison of rural/urban differences using the government’s rural/urban definition.
3. To consider quality of life issues that may be particularly important in a rural context and to extend our analysis on quality of life to incorporate those aspects for which suitable data can be collected.

Time-Scale and Cost
From: 2009

To: 2009

Cost: £24,000
Contractor / Funded Organisations
Enterprise LSE
Economic Research              
Rural Issues              
Fields of Study
Rural Affairs